MARKET COMMENT
Trade! The Market is Falling!

By Maynard Paton (TMFMayn)
July 3, 2001

Carburton Street, London -- The stock market has taken a battering over the past eighteen months. Old hands will know that this latest downturn is a regular, and indeed welcome, occurrence when stock picking for the longer term. However, those with less market experience can be put off long-term investing in such market conditions.

On nothing more than a 10% market fall over twelve months, some investors, thinking they have been recently "burned" by a long-term buy and hold philosophy, are being encouraged into more active "strategies". Here's a quote from a well-known stock market pundit taken from a well-known newspaper over the weekend:

"In stock market conditions like these, popular approaches to investing such as buying and holding for the long run are likely to disappoint investors. The buy-and-hold technique typically produces losses when employed after periods of above average growth."

So, should the ordinary investor switch from a long-term investment strategy now that the market has recently fallen?

Firstly, let's take the passive long-term investor who drip feeds money into an index tracker. The course of action is simple -- continue with the tracker. It must not be forgotten that Shares Continue to Outperform All Other Investments Steadily Over the Long Term. Over any 25-year period you care to mention, shares have beaten gilts and cash.

Now, let's turn our attention to the individual long-term stock picker. Time to adopt a shorter-term trading strategy? Of course not, unless a sudden ability to predict market movements has been developed. In general, it's far easier to stick with making predictions such as "Unilever (LSE: ULVR) will be selling more food in five years' time" rather than second-guessing how "market sentiment" will affect Unilever's share price next month.

The simple fact is that trying to consistently beat the market average is difficult, whichever way you select your shares. And chopping and changing your stock picking strategy every time the market takes a turn is a sure-fire route to underperformance. In short, investors should continue with their preferred stock picking process, irrespective of how the overall stock market is performing. Remember, the performance of individual shares will always vary enormously from the market index.

More: Learn about Index Trackers in the Motley Fool's ISA Centre | Market? What Market? | Shares Continue to Outperform All Other Investment Steadily Over the Long Term | Three Cheers For Mr Market!